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We are heading back into a serious recession that will
be similar to the crisis of confidence in 1974 with the Nixon impeachment.
During Nixon's landslide victory for a second term and the ensuing Watergate
impeachment, I lived in Washington DC and watched the ensuing chaos with a
front-row seat. The break-in of the Democratic national headquarters in the
Watergate complex occurred before the election, yet it did not stop Nixon's
re-election.

The country and Washington DC became accustomed to
cover-ups and deceptive practices. Anger over Vietnam and the assassinations
of respected leaders manifested into mass protests and arrests. I still
remember tear-gas canisters in the streets of Georgetown. In a second, we'll
take a look at some charts showing just what this turmoil did to the stock
market.

Nearly 40 years later, the cover-ups haven't stopped.
Today, we have a cover-up of an assassinated ambassador and three others in
Libya. If enough people ask questions – like Congressman Darrell Issa has been – about why there was weak security,
we might even open a bigger can of worms, as this assassination is a bigger
deal than most people realize. And again, much like with Nixon, the economic
climate grows troublesome with high unemployment, growing future inflation
concerns thanks to QE3, and the world economy slowing. As was the case back
then, we're a powder keg ready to blow. Remember the explosion of bad government
regulations the last time around – like wage and price controls? I
remember them all too well, as I was a consultant to the energy division of
the Nixon administration's Economic Stabilization Program Phase 2.

Obama's win gives a false sense of having resolved a
key uncertainty. But the fundamental problems we face are bigger than one
leader's capability to solve them. No good answers are on the table for our
budget deficits and endless wars. European peripheral countries struggle with
50% youth unemployment, leading to worries of money-printing and currency
crisis. If we add an environmental catastrophe, such as a crop failure
leading to food shortages, the world could face much bigger downturns than
purely financial analysis can predict.

The 1974 stock market crash was the second biggest
compared to the crisis we went through in 2008. It was precipitated by
political crisis more than financial difficulties. The Vietnam War and
Johnson's expansion of social services created deficits that at the time that
seemed too large. Today, of course, we have political problems as well as
financial problems. And this time around, the deficits don't just seem
large and unsustainable, they are too large
and unsustainable. On top of that, Bernanke and Greenspan have spent every
bullet in the arsenal to avoid short-term disaster. While in the '70s we
still had a box of bullets, we're now running on empty – and the enemy
is closing in on our foxhole.

Since 2000, we have had two crises – one being
the dot-com bubble, and the latest is the housing
bubble. As the financial crisis gets worse, so will the political backlash
and the disruptions in society. This scenario suggests much higher inflation,
disenfranchisement of workers, and government oppression to maintain control.

The chart below shows some of the effects of key
moments of political turmoil on the stock market, as well as the relationship
of those changes to the Purchasing Managers' Index. This Index is one of the
most reliable indicators of the country's growth in manufacturing output and
thus the growth of GDP. It comes from surveying purchasing managers as to
whether the economy is improving or getting worse on a number of measures
like orders, shipments, exports, prices paid, etc. The composite of
these measures is provided monthly and is not revised. It is not a government
number, so it is not vulnerable to manipulation to make the story fit the
political agenda. It can provide an early warning of a slowing economy and
can be useful for interpreting what might happen to the stock market.

The specifics of the Nixon-era stock collapse are shown
in close-up in the chart below. It could happen again. The polarization of our
factions is now back at the levels of that era, and
there are no signs of it diminishing.

In the most recent issue of The Casey Report, I
have an extensive piece on the importance of the Purchasing Managers' Index
(PMI) and other measures for the US and many others countries – some of
the results may surprise you as they surprised me. The analysis led me to
change my view of where our economy may be heading. For more on that, make
sure to check out the latest Casey Report.

Besides our own political problems, there are a whole list of countries ready to erupt into turmoil,
including Libya, Syria, Afghanistan, Pakistan, Somalia, and Iran. Add the
likelihood of an environmental destabilization of, say, some big crop failure
to our recurring financial crisis, and the probabilities are even higher that
the next year or two will be very bad on several dimensions.

And that's just half the problems on our plate. Here
are a few more to consider over the next two years: the US fiscal cliff and
continuing budget deficits; a collapse of the European currency union;
and an Asian hard landing.

There are many links between politics and money. I fear
we will see some serious problems ahead because we haven't fixed anything and
the only actions our leaders seem to know how to take are to expand the money
supply.

The worldwide money-printing by central banks to fund
government overspending is close to reaching its conclusion. When governments
run out of stimulus to prop up their financial sectors and to placate the
masses, then things really start to unwind.

I am of the opinion that money will be inflated out of
existence by corrupt governments and central bankers, so we should be buying
physical assets like farmland, houses, commodities, precious metals, and
energy. We should avoid bonds or any fixed-dollar return like bonds. In a
way, one wishes that a single president or re-election could make all of
these things go away, but that's just not going to happen. The world's
problems are now much bigger than the presidency, and they continue to pile
on in a similar way to what we witnessed during the '70s.

Bud Conrad, chief economist, holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl, and Tandem. Currently, he serves as a local board member of the National Association of Business Economics and teaches graduate courses in investing at Golden Gate University. Bud Conrad has been a futures investor for 25 years and a full-time investor for a decade.